(Reuters) - Seven years ago, the United Nations and Western powers began subjecting Tehran to steadily harsher economic sanctions. Around the same time, an organisation controlled by Supreme Leader Ayatollah Ali Khamenei started to study how some developing economies managed to grow fast.

Setad, as the organisation is known, had amassed billions of dollars in property seized from Iranian citizens. What Iran lacked and needed, Setad decided, was conglomerates on a par with those of South Korea, Japan, Brazil and the United States.

According to an account this year by a senior official in the unit that oversees Setad’s financial investments, Ali Ashraf Afkhami, the organisation also picked the perfect candidate to create an Iranian national champion: Setad itself.

The ayatollah’s organisation would go on to acquire stakes in a major bank by 2007 and in Iran’s largest telecommunications company in 2009. Among dozens of other investments, it took over a giant holding company in 2010.

An organizational chart labeled “SETAD at a Glance,” prepared in 2010 by one of Setad’s companies and seen by Reuters, illustrates how big it had grown. The document shows holdings in major banks, a brokerage, an insurance company, power plants, energy and construction firms, a refinery, a cement company and soft drinks manufacturing.

Today, Setad’s vast operations provide an independent source of revenue and patronage for Supreme Leader Khamenei, even as the West squeezes the Iranian economy harder with sanctions in an attempt to end the nuclear-development program he controls.

“He has a huge sum at his disposal that he can spend,” says Mohsen Sazegara, a co-founder of the powerful Islamic Revolutionary Guard Corps military force, who is now living in exile in the United States. “When you have this much money, that’s power itself.”

Even as Setad was gaining ever-greater control over the Iranian economy in recent years, the Western powers knew of the organisation and its connection to the supreme leader - the one man with the power to halt Tehran’s uranium-enrichment program. But they moved cautiously, and Setad largely escaped foreign pressure.

In July 2010, the European Union included Mohammad Mokhber, president of Setad, in a list of individuals and entities it was sanctioning for alleged involvement in “nuclear or ballistic missiles activities.” Two years later, it removed him from the list.

In June, the U.S. Treasury Department added Setad and 37 companies it “oversees” to its list of sanctioned entities. Khamenei wasn’t named in the announcement, but a Treasury official later told a Senate committee that Setad is controlled by the supreme leader’s office.

Asked why Khamenei himself wasn’t targeted, U.S. officials told Reuters they did not want to play into the hands of Iranian officials who maintain that Washington’s ultimate goal in pressuring Iran with sanctions is to topple the government.

“Regime change is not our policy,” said one U.S. official. “But putting pressure on this regime certainly is.”

By the time Setad felt the pressure, it was already a giant.

As reported in Part 1 of this series, Setad was founded with modest ambitions. Its genesis was a two-paragraph order issued in 1989 by Khamenei’s predecessor, Ayatollah Ruhollah Khomeini, shortly before he died. The order directed two aides to sell and manage properties that had supposedly been abandoned during the chaotic years following the 1979 Islamic Revolution, and channel much of the proceeds to charity. The edict ultimately sparked a new organisation whose full name in Persian is “Setad Ejraiye Farmane Hazrate Emam” - the Headquarters for Executing the Order of the Imam.

According to one of its co-founders, Setad was meant to last two years. But under Khamenei’s control, it remained in business, amassing a giant portfolio of real estate by claiming in Iranian courts, sometimes falsely, that the properties were abandoned. In fact, many were seized from members of religious minorities, and business people and other Iranians living abroad.

Since 2000 it has moved into almost every area of the economy.

In an interview, David Cohen, the Treasury Department’s Under Secretary for Terrorism and Financial Intelligence, said Setad now generates “billions of dollars a year” in revenue. He added that “the supreme leader’s own money is handled and invested in” a Setad division known as the Tadbir Economic Development Group, although he said the amount isn’t known. A Treasury Department spokesman said Tadbir also manages investments for “other leadership figures” in Iran, but didn’t name them.

The Iranian president’s office, the foreign ministry and Tadbir Economic Development Group didn’t respond to requests for comment. Iran’s embassy in the United Arab Emirates issued a statement calling Reuters’ findings “scattered and disparate” and said that “none has any basis.” It didn’t elaborate.

Setad’s director general of public relations, Hamid Vaezi, said in an email that the Reuters series is “far from realities and is not correct” but didn’t go into specifics. In a subsequent message, he said Setad disputes the Treasury allegations and is in the process of hiring U.S. legal counsel to challenge the sanctions.

Setad’s total net worth is difficult to pinpoint due to the secrecy of its accounts and because its stakes in companies frequently change. But Reuters was able to identify holdings of real estate, corporate investments and other assets in Setad’s control worth about $95 billion. That estimate is based on statements by Setad officials, data from the Tehran Stock Exchange and company websites, and information from the Treasury Department.

About $52 billion of that sum is in property. The head of Setad’s real-estate division said the property unit was worth that amount at a press conference in 2008. It is possible that this figure has risen or fallen since then as the portfolio has evolved.

Setad also has an estimated $43 billion or more in corporate holdings, Reuters found:

* The U.S. Treasury Department assessed Rey Investment Co, controlled by Setad, as worth about $40 billion in 2010, the year Setad took control of it. (The Treasury did not put an overall value on Setad).

* Through a subsidiary, Setad bought a 19 percent stake in Telecommunication Co of Iran, the country’s largest telecom provider, for about $3 billion.

* Reuters also identified at least 24 publicly traded companies not named in the recent Treasury sanctions in which Setad, or a company it invested in, held a minority stake. At the current official exchange rate, those investments are worth more than $400 million, according to valuations from the Tehran Stock Exchange and data gleaned from the exchange and company websites.

* Reuters further identified 14 companies Setad has investments in - often through other businesses - that couldn’t be valued because they are not publicly traded.

The Revolutionary Guards, the powerful military unit tasked with protecting Iran from both domestic and foreign threats, has long held a pivotal role in the country’s economy, with extensive holdings in defense, construction and oil industries, according to the U.S. State Department.

Setad gives the supreme leader a significant financial resource of his own, one that greatly adds to his power.

Khamenei appoints Setad’s board of directors but delegates management of the organisation to others, according to one former employee. This person said the supreme leader is primarily concerned about one thing: its annual profits, which he uses to fund his bureaucracy.

“All he cares about is the number,” this person said.

“IT‘S LIKE A TSUNAMI”

Details of how Setad has acquired so many stakes in public and private businesses are hazy. People familiar with the organisation say it has bought shares on the open market and pressured investors to sell it shares. In at least one case, shares Setad now controls were confiscated from their original owner.

Shirin Reghabi, a teacher now living in California, told Reuters she was a major shareholder in Fars & Khuzestan Cement Co, which states on its website it is Iran’s largest cement firm. The shares, which she had purchased several years before the 1979 revolution, were seized more than 20 years ago, she said.

Her husband, attorney Ross K. Reghabi, said when he looked into the matter a few years ago, he learned that the shares had been confiscated by a foundation called Bonyad Mostazafan, but then transferred to another company that was connected to Setad. He estimates the shares are now worth close to $100 million.

“It’s like a tsunami now. They are in control of all these companies,” he said.

The Reghabis concluded they had no recourse against the ayatollah’s organisation. “I gave up,” Mrs. Reghabi said.

In 2000, Setad took one of its earliest steps to formalize its move beyond property, setting up an investment management firm called Tadbir Investment Co. It would eventually become one of at least five main vehicles through which Setad holds corporate stakes.

Mahmoud Ahmadinejad, a hard-line conservative, was elected Iran’s president in 2005, replacing a more moderate leader. Iran holds regular presidential and parliamentary elections, though the real power remains with the supreme leader. Two months later, Tehran announced it had resumed uranium conversion as part of a nuclear program. The West believes Iran wants to build atomic weapons. Iran has long said the program is for peaceful energy development - a position Tehran reiterated in recent days when it and Western powers held marathon talks aimed at a possible rapprochement. Those talks failed to reach a deal; negotiations will resume soon.

In December 2006, the United Nations Security Council imposed sanctions on Iran’s trade in nuclear-related materials and technology, and froze assets of key individuals and companies involved in the nuclear program.

A SPECIAL BANK

Meanwhile, Setad was making a push into banking. Parsian Bank had opened for business in 2002, and it was different from other Iranian lenders. It offered interest rates that were slightly higher than government-run banks. But while other financial institutions typically capped the size of their mortgage loans, Parsian was willing to finance 80 percent of a property’s value, making financing a real option for many new homebuyers. “People could actually buy houses,” said one former employee who requested anonymity.

Parsian was particularly unusual in another aspect: It had a lenient dress code. Men wore ties and women used makeup, which Iran’s religious conservatives criticize for contributing to the spread of Western culture.

“People liked to come in the bank just to watch the people working there,” said the ex-employee, who added that in its hiring practices, Parsian “was very much valuing people based on brain and intellectual capacity, not based on their connections.”

By 2006, Parsian had opened more than 100 branches and become Iran’s largest non-state bank. But the institution faced trouble.

According to people familiar with the matter, in 2005, Mohammad Shariatmadari, who had served on Setad’s board of directors, asked Parsian’s managing director, Abdollah Talebi, for a $44 million loan for a foundation he managed.

Shariatmadari offered no collateral for the loan; Talebi refused. Meanwhile, President Ahmadinejad publicly criticized the lending practices of private banks, accusing them of making huge loans to favored clients. News media reported that he had Parsian Bank in his sights. Under pressure, Talebi resigned as managing director in 2006 and later quit the bank’s board after Iran’s Central Bank disqualified him for allegedly violating its rules on loans.

Neither Talebi nor Shariatmadari responded to requests for comment.

It was during this period that Setad’s investment firm, Tadbir Investment Co, acquired a stake in Parsian. Although the stake was small - a Setad official later suggested it was 16 percent - the former employee likened Tadbir’s arrival to “a hostile takeover.”

A schoolgirl holds a picture of Iran's Supreme Leader Ayatollah Ali Khamenei as she performs at a ceremony to mark the anniversary of the Islamic Revolution at the Behesht-e Zahra (Zahra's paradise) cemetery in southern Tehran in this February 1, 2010 file photo. REUTERS/Stringer/Files

The atmosphere at Parsian changed dramatically, according to the ex-employee. Ties were banned for men. Female employees began receiving letters asking, “Why are you wearing jeans? Why are your lips red?”

New managers arrived. “Even the customers of the bank changed,” the ex-employee said. “They brought their own customers and clients.”

The bank’s board also changed. According to Parsian’s website, its members now include Aref Norozi, who it also says serves on the board of Tadbir Investment. Norozi was also head of Setad’s enormous real-estate division, which sells and manages confiscated properties. It was Norozi who in 2008 put the value of Setad’s real-estate holdings at about $52 billion.

SANCTIONS AND RESILIENCE

Despite the sanctions, Iran’s economy grew at a healthy 6 percent in the two years leading up to the financial crisis of 2008. After a sharp drop, growth was back to just below 6 percent in 2010, according to the International Monetary Fund. Oil exports kept the money flowing. Iran exported $70 billion worth of oil in 2009 and $90 billion in 2010, according to IMF figures.

These were years of expansion for Setad. In 2006 or 2007, Setad conducted a study to explore why certain developing countries were outgrowing Iran. The deliberations were described in an interview given to the reformist Iranian newspaper Shargh in April this year by Afkhami, whom the paper identified as chairman of the Tadbir Economic Development Group, the unit that oversees most of Setad’s financial investments.

“In South Korea, companies like Samsung, LG and Hyundai have had an impact on development. In China, Japan, Brazil, Germany and America it’s the same,” said Afkhami. “We saw that in Iran we don’t have these large corporations. With this in mind, within the Tadbir Investment Company we started slowly, slowly discussing the strategy of entering various arenas,” he told the paper. “This strategy was approved by the management of Setad.”

And it was soon implemented. In September 2008, Norozi, then managing director of Setad’s property division, announced a restructuring of the entire organisation at an official Setad ceremony in the city of Bushehr, according to a report by the semi-official Fars news agency. He said Setad had been transformed “from a collective that sells property into an economic conglomerate” that held investments in publicly traded companies. He said it had invested $833 million so far, including a 16 percent share in Parsian Bank.

Norozi noted that Setad also had another “subsidiary”: the Barakat Foundation, which he said “has the duty of eliminating poverty and empowering poor communities.”

Shahin A. Shayan, who spent two years working at Goldman Sachs in New York, told Reuters Barakat started about six or seven years ago and was based on a model he developed. A U.S.-born, Columbia University graduate and standout college football player, Shayan had spent most of his childhood in Iran and returned there in the mid-1990s.

Shayan said Barakat, a non-profit, was designed to create jobs in rural areas of Iran. The foundation raised capital from private sources, local governments and Setad, and initially began with about $4 million or $5 million, he said. But he said Barakat remained “totally independent from any entity.” The foundation offered assistance in agriculture and to food businesses and small mining operations, he said, as well as building schools, roads and houses. “It wasn’t billions of dollars,” he said.

Shayan said he left Barakat about three-and-a-half years ago. “I wanted to go back and do research and lectures and things like that,” he said. He said he didn’t know what became of the organisation after his departure. “Don’t ask me what it is now because I have no idea.”

It is now part of Setad’s empire, according to the foundation’s website.

In his interview with Shargh newspaper in April, Setad’s Afkhami said “nearly 100 percent of the income of Setad and the Tadbir Group is placed at the disposal” of the Barakat Foundation. The foundation, he said, had spent more than $1.6 billion in the past five years on development projects, as well as building 200 schools, 400 homes and health clinics.

Setad’s claims about its charity spending are impossible to verify because its accounts are not publicly available. Moreover, in the same interview in which Afkhami claimed nearly 100 percent of Setad’s income went to Barakat, he later said: “Of course part of the income has been spent on developing companies in the Tadbir Group.”

Officials at Barakat could not be reached for comment.

“SENSITIVE LEGAL ISSUES”

Women look at jewellery displayed in the window of a shop in northern Tehran in this May 26, 2009 file photo. REUTERS/Stringer/Files

One of Setad’s biggest deals came in 2009, when it acquired a large minority stake in Iran’s biggest telecommunications company, which has a near monopoly on the nation’s landline telephone services.

According to a 2010 slideshow prepared by a Setad subsidiary company, Setad that year held 38 percent of a consortium called Tose‘e Etemad Mobin Co. A year earlier, the consortium had acquired 50 percent plus one share of Telecommunication Co of Iran (TCI), for $7.8 billion. The buyers got favorable terms: The slideshow says the winning consortium - whose largest stakeholder was a company controlled by the Revolutionary Guards - was required to put down 20 percent and had eight years to pay the rest.

In 2010, Setad obtained control of an even bigger prize: Rey Investment Co, whose value the U.S. Treasury in June put at about $40 billion as of December 2010. A conglomerate within the larger conglomerate of Setad, Rey has investments that include an oil company, a mining company and two ostrich farms. The Treasury Department says Setad took control of Rey Investment after the Iranian government cut off its funding because of alleged mismanagement.

No one at Rey Investment answered the phone despite attempts by reporters to seek comment.

As it grew, Setad began looking outside Iran. In 2010, a unit of the organisation tried to woo foreign investors. The organizational chart titled “SETAD at a Glance,” written in English, was part of a PowerPoint presentation by Setad-owned electronics firm Iran Mobin Electronic Development Co. The presentation was aimed at attracting a foreign partner.

“Our main expectation,” one slide stated, “is to reach to much higher income with an experienced Int‘l partner such as KPN.” KPN is the largest telecommunications firm in the Netherlands.

A KPN spokesman said: “Naturally KPN respects the trade embargo with Iran. KPN does not and has not done business with this Iranian company.”

By this time, Setad was attracting attention in the West. The Treasury Department says Setad used several companies it gained control of in 2010 to bypass sanctions, including transferring funds from Iran to Europe and Africa.

In July 2010, the European Union issued a 12-page list of Iranian individuals and entities it was sanctioning. Among them: Mohammad Mokhber, president of Setad, which the EU described as “an investment fund linked to Ali Khamenei, the supreme leader.” Mokhber and the others were cited for alleged links to Iran’s nuclear or missile programs, but the EU gave no further details. The action didn’t target Setad itself.

The broader sanctions effort grew tougher. That same month, Washington enacted its strictest measures so far, the Comprehensive Iran Sanctions, Accountability and Divestment Act, which targeted Iran’s oil and gas sector. The Act, and a series of EU and U.S. sanctions over the following two years, increased pressure on Iran, in particular its energy exports and its banks.

Growth slowed to 3 percent in 2011, and the economy shrank 1.9 percent in 2012. Oil exports have fallen by around 60 percent in the past two years as European and most Asian buyers reduced imports because of U.S. and EU sanctions. Iran now earns around $100 million from oil sales a day, down from $250 million two years ago.

Setad itself, however, managed to evade the tightening noose. In October 2012, without any explanation, the EU removed Mokhber from its sanctions list.

According to a person familiar with the matter, the EU delisted him in an attempt to fend off a broader Iranian legal challenge to financial sanctions on Iran’s banks and bank directors. The EU had listed Mokhber as head of Setad and as chairman of Sina Bank. Sina is among the Iranian banks that have won rounds in European courts seeking to lift sanctions on them. It’s not clear whether he had filed an appeal.

A spokesman for the EU’s foreign affairs chief, Catherine Ashton, declined to comment, saying, “As I‘m sure you understand, these are sensitive legal issues and we’d prefer not to say anything.”

INFLUENCE SPREADS

The Treasury Department declined to specify how its June sanctions were affecting Setad. It is possible that the new measures will ramp up the pressure on Khamenei’s economic empire. And some of Setad’s operations, of course, are in sectors such as oil and banking that have been hammered by prior sanctions.

“Sanctions have had a significant impact on the government of Iran and have pushed the Iranians back to the negotiating table,” said a Treasury spokesperson.

Because its holdings are so extensive, however, Setad also has investments that remain relatively untouched.

Take the telecommunications industry, a sector the West has largely spared from sanctions.

Setad’s TCI affiliate reported a net profit in 2010, the latest year for which figures are available, of $1.54 billion. Setad’s share of those earnings would work out to $290 million.

Although Setad holds a minority stake in TCI, its influence can be seen at the highest levels inside the company. TCI’s chairman is Mostafa Seyed Hashemi, who previously served as chairman of Iran Mobin, the Setad electronics subsidiary.

Other Setad officials have been named or nominated to top government, military and economic posts in recent years.

The chairman of the board of the Tehran Stock Exchange, Hamidreza Rafiee Keshtli, is a member of Setad’s Tadbir Investment, according to the exchange’s latest annual report.

Gholam Hossein Nozari, a former oil minister, is chairman of Tadbir Energy Development Co, Setad’s energy-holdings division, as well as Pars Oil, in which Setad holds a stake, according to the companies’ websites. Iran has been trying, so far unsuccessfully, to have Nozari named secretary general of OPEC, the Organization of the Petroleum Exporting Countries.

In August, newly elected Iranian President Hassan Rouhani named Hossein Dehghan as defense minister. Dehghan served as chairman of Iran Mobin. Last month, Rouhani named Mohammad Shariatmadari - the person who had served on Setad’s board and who allegedly sought a loan from Parsian Bank - as vice president for executive affairs.

Keshtli, Nozari and Dehghan did not respond to interview requests.

NO ORDINARY CHARITY

Setad’s expansion appears to continue. In May, its charitable foundation, Barakat, announced it was entering “into new pharmaceutical fields,” including biotechnology, nanotechnology and gene therapy. The charity runs a unit called Barakat Pharmaceutical Co that, according to the unit’s website, has more than 20 subsidiaries and had more than $1 billion in sales in 2011.

One of Barakat Pharmaceutical’s units is ATI Pharmed Pharmaceutical Co. Barakat Pharmaceutical describes ATI as a joint venture between it and a Swiss company, Stragen Pharma SA, to produce oral contraceptives. ATI’s website displays information about a number of Stragen products that the Iranian company says it has licensed to produce in Iran. It is not clear whether production has begun.

Officials at Geneva-based Stragen - which according to Barakat Pharmaceutical owns 34 percent of ATI - didn’t respond to requests for comment.

Last October, Khamenei warned that family planning would lead to an aging population. “One of the mistakes that we made - and I am also responsible for this mistake - is that the issue of limiting the population growth should have been stopped from the decade of the ‘70s (1991 in the Western calendar) onward,” he said in a speech.

“Families and the youth must increase the birth rate, increase the population,” he continued. “This limiting of children in homes, the way it is today, is a mistake.”

The business empire controlled by Iran’s supreme leader had grown so large that it now owned companies whose products Khamenei opposes. That expansion was the direct result of a legal strategy that came from the very top.